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Bank of England pressured by post-Brexit hit to confidence

Monday, July 18, 2016 - 22:51

British businesses plan to cut back and fewer shoppers are visiting stores after last month's vote to leave the European Union, raising pressure on the Bank of England to cut interest rates and stimulate the economy.

PHOTO: AFP

[LONDON] British businesses plan to cut back and fewer shoppers are visiting stores after last month's vote to leave the European Union, raising pressure on the Bank of England to cut interest rates and stimulate the economy.

Four in five of Britain's top listed companies plan to reduce capital investment in the year ahead, according to a survey by Deloitte conducted after the June 23 Brexit vote, with optimism lower even than after the 2008 global crash.

"The spike in uncertainty has had a toxic effect on business sentiment," said Ian Stewart, Deloitte's chief economist, of its survey of chief financial officers of Britain's 350 biggest companies.

While Prime Minister Theresa May's new government hailed Monday's US$32 billion takeover by Japanese telecommunications conglomerate Softbank of chip designer ARM as proof Britain was "still open for business", a clutch of surveys of the referendum's impact on confidence made for grim reading.

The number of shoppers visiting stores fell at the fastest rate in two years in June, with the fall especially severe in the period immediately around the referendum, the British Retail Consortium said, while property website Rightmove said asking prices for houses and flats dipped after the vote.

Pollster Ipsos MORI's index of economic confidence fell this month to its lowest in four years, with 57 per cent of Britons expecting the general situation to deteriorate over the next 12 months - nearly double the reading from a month before.

Economist Andrzej Szczepaniak at Barclays forecast a 1.6 per cent contraction in fixed capital investment by British businesses this year and a deeper drop of 2.6 per cent in 2017.

"As the impact from the referendum result sets in, and already elevated levels of uncertainty spiral higher as the UK's post-exit relationship with the EU and the rest of the world remains unclear in the near term, confidence levels are likely to fall further," Mr Szczepaniak said in a research note.

Barclays expects Britain to slide into a shallow but prolonged recession in the second half of this year, forecasting the economy will contract at a quarterly rate of around 0.1 per cent through to the end of 2017.

After the Bank of England surprised markets last Thursday by holding its 0.5 per cent Bank Rate unchanged, despite Governor Mark Carney's earlier call for fresh stimulus, attention is now focusing on its August policy meeting.

Gertjan Vlieghe, the only member of the nine-member Monetary Policy Committee to vote for an immediate rate cut last week, argued in the Financial Times on Monday for an extra package to shore up activity in Britain's US$2.4 trillion economy.

Yet fellow MPC member Martin Weale said cutting ultra-low policy rates for the first time in seven years might be counter-productive.

"I do not have any sense that either consumers or businesses are panic-struck," Mr Weale said in a speech to the Resolution Foundation, a think-tank, that lifted sterling.

Mr Weale's concerns focused on other countries where interest rates have reached zero, or even cut them into negative territory - an environment that can make it hard for banks to fund themselves and lend profitably.

The unintended consequence, he said in response to questions at the event, was that banks in countries such as Switzerland have raised mortgage rates rather than passing on central bank rate cuts to borrowers.

"We have to be very careful about not cutting interest rates in a way that actually tightens monetary policy rather than eases monetary policy," said Mr Weale.

Economists expectMr Carney to huddle with new Chancellor of the Exchequer (finance minister) Philip Hammond to seek new ways to pump stimulus into the economy by means of quantitative easing and possibly fund government infrastructure projects.

Former finance minister George Osborne mostly opposed borrowing more for investment projects. If the BoE were to assist this, some experts may view it as a risky move towards direct central bank funding of government borrowing that has historically tended to end in a surge of inflation.